IMF's Lagarde calls for America to act on debt limit

The "clock is ticking" on the debt limit, and the U.S. needs to show "political courage" in addressing the issue, according to International Monetary Fund (IMF) Director Christine Lagarde.

Speaking to the Council on Foreign Relations, Lagarde warned that failure to raise the debt limit promptly would cause problems that reach beyond America's shores and across the globe.

"Clearly the issue needs to be resolved immediately," she said. "An adverse fiscal shock in the United States could have serious spillovers on the rest of the world."

She added that the government also needs to take on a "credible fiscal adjustment plan ... sooner rather than later."

Lagarde said that in addressing their own debt crisis, European leaders have shown just the type of courage the United States needs to tackle its own problems.

She did, however, warn that major efforts to rein in the deficit could also stifle economic growth. IMF research has found that for every one percentage-point cut to the deficit, it could lower economic growth by half a percentage point over two years.

With this in mind, she pushed a plan that would mandate deficit-reduction efforts now but not have those efforts take place until later in the future, when the economic recovery has more momentum.

Once a nation takes on its deficit, it can expect to reap the benefits over the long term, she argued. Reducing a nation's debt burden can reduce the cost of borrowing, which in turn can free up space to cut taxes.

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